Question

In: Economics

1. Ned buys goods X and Y. He can just afford the bundle X = 4...

1. Ned buys goods X and Y. He can just afford the bundle X = 4 and Y = 4. He can also afford X = 6 and Y= 3. Each of these bundles exhausts his income. For full credit, show all necessary work to answer the questions below.

a. What is the ratio of the price of x to the price of y?

b. Write an equation that gives you Ned's budget line.

c. If Ned spent all his money on x, how much x could he buy? If he spent all your money on y, how much y could she buy?

d. Draw Ned’s budget line.

Solutions

Expert Solution

Two bundles are given as,

a) At (x₁,y₁), the budget line is:

At (x₂,y₂), the budget line is:

Divide equation 1 by 2.

b) Let the price of x is $1.

The equations of the budget line from equation 1 will be:

The equations of the budget line from equation 2 will be:

From equations 3 and 4,

So, the equation of the budget line will be:

c) If Ned spent all his money on x, y will be zero.

If Ned spent all his money on y, x will be zero.

d) Ned’s budget line from two points (4, 4) and (6, 3) will be:

Rahul Sunny answered 1 year ago

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